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ECON Test 1
Terms in this set (160)
The slope of a nonlinear curve is ________ when the curve is rising, and ________ when the curve is falling.
Economic analysis is used
in all decision making.
All of the following are examples of macroeconomic problems
Inflationary pressures caused by an increase in the cost of petroleum.
Unemployment caused by a fall off in the level of residential construction.
A decline in the rate of overall economic growth.
A useful economic model
yields usable predictions and implications for the real world.
If the slope of a curve is 1/3, we know that
the relationship is linear, and the line moves from lower left to upper right.
The rationality assumption implies that
individuals will not intentionally make decisions that leave them worse off.
can be used to explain or predict economic phenomena.
Economists assume that an individual acts as if motivated by
Rational self-interest means
pursuing what makes you better off.
Consider the statement, "The number of beers consumed the night before a test affects the grade." In this statement
beer is the independent variable and test grade is the dependent variable.
a normative statement is
When we express a value judgement, we a simply stating what we prefer, like or desire. Because individual values are diverse we expect that people widely varying value judgements of how the world ought to be.
Central planning is a key characteristic of which economic system?
command and control
Which of the following would be a topic of study in microeconomics?
the amount of steel purchased by general motors
A positive statement is
It is a statement of what is. It is not a statement of anyone's value judgement or subjective feeling.
Some people claim that the "economic way of thinking" does not apply to issues such as health care. All of the following choices clearly demonstrate how economics applies to this issue, except when
the individual decides against health care as it may make him better off
Which of the following statements best demonstrates the concept of bounded rationality?
Individuals make short-run choices that are not consistent with their long-term goals.
the study of how people allocate their limited resources to satisfy their unlimited wants.
the things that have value and are used to produce goods and services that satisfy peoples wants
the items people would purchase if they had unlimited income
is the part of economic analysis that studies decision making undertaken by individuals (households) and firms. It's like looking through a microscope to focus on the small parts of our economy.
is the part of economic analysis that studies the behavior of the economy as a whole. It deals with economic worldwide phenomena such as changes in unemployment, in the general price level and the nation's income.
The Three Fundamental Questions of Economics concern the problem of how to allocate society's scarce resources:
What and how much will be produced?
How will items be produced?
For whom will the items be produced?
Two antithetical answers:
The command and control economic system (aka central planning)- an authority figure addresses the economic issues and makes all the decisions on how to allocate resources
The pricing system (aka market system)- private parties determine how what to produce and how much it will cost, families are free to choose what products to buy with their personal income
Mixed Economic Systems- occur when when the government may need to regulate resources due to a crisis.
define the array of circumstances is which our model is most likely to be applicable
ceteris paribus assumptions
the assumption that nothing changes except the factor or factors being studied (all things are equal or constant)
the hypothesis that people are nearly but not fully, rational, so they cannot examine every possible available choice to them but instead use a simple rule of thumb to sort among the alternatives that happen to occur to them.
an approach to the study of consumer behavior the emphasis psychological limitations and complications that potentially interfere with rational decision making
a relationship between two variables that is positive, meaning they correspond with each, the both increase or decrease. (upward slope left to right)
A relationship between two variables that is negative, meaning the are opposites One decrease and the other increases, or one increases and the other decrease..(downward slope left to right)
The economic way of thinking is best described as
an analytical framework enabling one to reach informed conclusions.
A rational , self-interested student decides whether to purchase a textbook required for a particular class based on
His limited resources, such as income and time.
Whether he can borrow the textbook from his friends.
The price of the textbook.
Rational, self-interested government officials seeking more funding for mass transit through higher taxes should consider
the fact that raising taxes is generally unpopular and may result in a potential loss in a future election.
A municipality taxing hotel guests to obtain funding for a new sports stadium should consider
All other alternative sources of funding the sports stadium.
The total cost of building the sports stadium.
The impact of that tax on possible reduction of tourism in the local region.
What is the relationship between wants and resources?
Resources are used to produce things that satisfy people's wants.
Microeconomics focuses on
decisions made by individual households and firms.
Each country has a unique economic system to allocate its scarce resources. However, the economic system of most of the world's nations are a combination of the
central planning system and the price system.
assumes individuals are rational and respond to different incentives.
An economic model is developed from a set of assumptions about consumer behavior and predicts that people will buy less of a good the higher the price of the good. Empirical testing of this model would involve
the collection of data to evaluate the usefulness of the model.
a situation in which the ingredients for producing the things that people desire are insufficient to satisfy all the wants at a zero price
Virtually any activity that results in the conversion of resources into products that can be used in consumption
Factors of production
Resources used in production (resources and factors of production are used interchangeably)
Factors of production can be classified as
Land (aka Natural Resources), Labor (human resource), Human Capital, Physical Capital, Entrepreneurship (a sub-division of labor)
alls things from which individuals derive satisfaction or happiness
Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price
The existence of scarcity requires
that people must make choices and face trade-offs in using their resources.
considered to be a resource (factor of production)
A small business owner
A copper mine.
A college professor.
Why do economists avoid making the distinction between wants and needs?
The term need is subjective making it difficult to distinguish between something someone wants and something they need.
Each individual must make choices because
resources are limited and therefore cannot satisfy one's many competing wants.
You are investing your resources in a college education because
your personal PPC will grow faster by investing in human capital and you will be better off.
What is the difference between absolute advantage and comparative advantage?
Absolute advantage is when someone can produce more of a good using a given quantity of inputs while comparative advantage is when someone can produce a good at a lower opportunity cost.
The division of labor increases the output of society by
allowing resources to specialize in the tasks for which they have a comparative advantage.
Which of the following statements is true?
Everyone can benefit when people specialize where they have a comparative advantage and then trade with each other.
Italy and Malaysia are countries that trade with each other. If Italy has a comparative advantage in cell phones and Malaysia has a comparative advantage in hats, which of the following is a correct statement about the effects of trade between these nations?
Both countries are likely to be better off, and world production will increase.
All points inside the production possibilities curve indicate
inefficiency in production.
The production possibilities curve (PPC) illustrates economic growth by a(n)
outward shift of the PPC.
If you receive a free ticket to a concert, what, if anything, is your opportunity cost of attending the concert?
The next best activity that can't be done while attending the concert
If miserable weather on the night of the concert requires you to leave much earlier for the concert hall and greatly extends the time it takes to get home afterward, the opportunity cost of attending the concert
A point inside the PPC means that
resources are not being fully utilized due to unemployment or inefficiency.
Greater economic growth is shown as
the distance the production possibilities curve shifts outward.
A country that must reduce current consumption to increase future consumption possibilities
must be producing along the production possibilities curve.
Tanya can make 33 loaves of bread loaves of bread or 1 apple pie in one hour. Jonathan can make 22 loaves of bread loaves of bread or 1 apple pie apple pie in one hour. Based on this information,
Tanya has a comparative advantage in making bread
Why is efficiency desirable?
It makes best use of the available resources.
The text argues that if avocado growers in Mexico can produce avocadoes cheaper than avocado growers in the United States, this will not reduce total jobs available in the United States.
The logic underlying this argument is that
avocado growers in the United States will switch to specializing in a crop in which they hold the comparative advantage.
Human resources that perform the functions of organizing, managing, and assembling the other factors of production are called
The production possibilities curve shows all possible combinations of
two goods that can be efficiently produced with a given set of resources.
The value of the best alternative sacrificed to obtain something you want is referred to as
If a country's production possibilities curve gets more bowed out over time, it is an indication that
resources have become more highly specialized.
Canada goes to considerable lengths to protect its television program and magazine producers from U.S. competitors. The United States often seeks protection from food imports from Canada. From an economy wide viewpoint, these efforts are
misguided because the enhanced output from specialization based upon comparative advantage is restricted.
tasks performed by individuals (aka intangible goods)
the highest valued, next best alternative that must be sacrificed to obtain something or to satisfy a want (in economics cost is always a forgone opportunity)
Production possibility curve (PPC)
A curve representing all possible combinations of maximum outputs that could be produced,assuming a fixed amount of productive resources of a given quality (can be used to define the notation of efficiency)
The case in which a given level of inputs is used to produce the maximum output possible. Alternatively, the situation is which a given output is produced at minimum cost.
Any point below the PPC at which the use of resources is not generating the maximum possible output
Law of increasing additional cost
the fact that the opportunity cost of additional units of a goo generally increases as people attempt to produce more of that good. This accounts for the bowed out shape of the PPC.
The trade-off between consumption and capital goods.
To have more consumer goods in the future, we must accept fewer consumer goods today. Because resources must be used in producing capital goods instead of consumer goods
The ability to produce more units of goods or services using a given quantity of resources or labor inputs. equivalently the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs.
The ability to perform an activity at a lower opportunity cost
The organization of economic activity so that each person consumes is not identical to what that person produces. Individual may specialize in accounting or being a lawer, a region may specialize in a product or service.
Division of Labor
The Separate of resources into specific different tasks. (ex. one automobile worker puts on the bumpers another the doors )
Trade between Nations
when nations specialize in an area of comparative advantage and trade with the rest of the world, the average standard of living in the world rises
Only comparative advantage not absolute advantage
determines how you will allocate your time
Which of the following is consistent with the law of demand?
A reduction of the price of salt led to a 5 percent increase in the quantity of salt purchased.
Suppose that at first the price of a jar of peanut butterjar of peanut butter is $1010 and the price of a jar of jellyjar of jelly is $66. Then, the price of a jar of peanut butterjar of peanut butter changes to $2020 and the price of a jar of jellyjar of jelly changes to $1414. What has happened the money prices and relative prices of these two goods?
The money price of a jar of peanut butterjar of peanut butter and a jar of jellyjar of jelly have risen and the relative price of a jar of peanut butterjar of peanut butter has fallen while relative price of a jar of jellyjar of jelly has risen.
Which of the following is an implication of the law of supply?
Producers will offer more units at a higher price and fewer units at a lower price. (The law of supply then implies that a movement along the supply curve occurs due to a change in market price.)
Which of the following will cause an outward (rightward) shift in supply?
A technological improvement.
If the demand and supply curves increase (shift outward) by identical proportions then
equilibrium price stays the same and quantity rises.
What if the increase in demand were larger than the increase in supply?
the equilibrium price and quantity increase.
What if the increase in demand were smaller than the increase in supply?
Equilibrium price falls and quantity rises.
Your answer is correct.
The law of supply predicts the supply curve will be
Which of the following is consistent with the law of supply?
An increase in the market price of MP 3 playersMP3 players causes an increase in the production of MP 3 playersMP3 players.
Equilibrium in a market occurs when
quantity supplied and quantity demanded are equal at the market clearing price.
If the price of airline travel in Europe falls and the demand for train travel in Europe also falls, then the two goods are
Suppose that at first the price of a pair of shoespair of shoes is $1515 and the price of a t minus shirtt−shirt is $99. Then, the price of a pair of shoespair of shoes changes to $3030 and the price of a t minus shirtt−shirt changes to $2121. What has happened the money prices and relative prices of these two goods?
The money price of a pair of shoespair of shoes and a t minus shirtt−shirt have risen and the relative price of a pair of shoespair of shoes has fallen while relative price of a t minus shirtt−shirt has risen.
If one day a terrible disease were to wipe out over oneminus−half of the orange trees in the United States, which of the following would likely result?
The supply curve of orange juice would shift upward and to the left.
Which of the following would cause a decrease a decrease in the demand for chicken?
a decrease in the price of hamburger, a substitute for chicken.
An increase in demand occurs when
the demand curve shifts to the right.
An increase in supply will occur when
the supply curve shifts downward to the right.
If the price of flash memory chips used in manufacturing smartphones decreases, what will happen in the market for smartphones?
This would cause smartphone
supply to increase causing the equilibrium price to
decrease and the equilibrium quantity to increase
The law of demand states that
the quantity demanded is inversely related to price.
A demand curve represents a(n)
indirect or inverse relationship between price and quantity demanded. (negatively sloped line)
The relationship between quantity supplied and price is usually
a direct relationship.
All of the following will decrease the supply of airline flights
A rise in the price of jet fuel
A reduction in the number of airline companies offering service.
An increase in the salaries of pilots
Law of Demand
The observation that there is a negative or inverse (opposite directions: one goes up other goes down) relationship between the price of any good or service that the quantity demanded, holding other factors constant
The price expressed in dollars today (aka the absolute or nominal price)
The price of one commodity divided the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity
A decrease in demand occurs when
the demand curve shifts to the left.
ceteris paribus conditions- demand
Determinants of the relationship between price and quantity that are unchanged along a curve. changes in these factors causes the curve to shift. (income, taste in preferences, prices in related goods, expectations, market size)
goods for which demand rises as income rises. Most goods are normal goods.
Goods for which demand falls as income rises
change in the price of good causes a shift in demand for the another good in the same direction as the price change
change in the price of one good causes an opposite shift in demand for the another good
A change in Quantity Demand
is caused by a change in the goods own price (causes a movement along the curve)
A change in demand
is caused by a change in determinants (causes a the curve to shift)
Law of Supply
The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal (there is usually a direct relationship with price and quantity supplied, the price rises quantity supplied rises, vice versa)
has a positive slope (decrease in cost there's a shift to the right, higher production cost there's a shift to the left)
ceteris paribus conditions- supply
Determinants of Supply: Technology and Productivity, Cost of Inputs Used to Produce the Product, Price Expectations, Taxes and Subsides, Number of firms in the Industry.
A change in Supply
A change of shift in supply is a movement of the entire curve. the only thing that can cause the entire curve to move is a change in one of the determinants.
A change in Quantity Supplied
When price changes, quantity supplied changes- there is a movement from one point to another along the same supply curve.
Market clearing price or Equilibrium
the price that clears the market at which quantity demanded equals quantity supplied; the price where the demand intersects the supply curve
A situation in which quantity demanded is greater than quantity supplied at a price below the equilibrium (not the same thing as scarcity)
A situation in which quantity supplied is greater than quantity demanded above the equilibrium
the price at which there is no tendency for change. Consumers are able to get all they want at that price, and suppliers are able to sell all that want at that price (given on the vertical axis directly to the left of where the supply and demand curves cross)
(given on the horizontal axis directly underneath the intersection of the demand and supply curve)
Buyers and sellers receive information about what should be bought and what should be produced
from prices in a market system.
Which of the following is not an example of a transaction cost?
The enjoyment of using the good.
Suppose that you are investigating the market for aluminum. The price of steel, a substitute good, has decreased. Which of the following would best describe the market reaction to this event?
The demand for aluminum decreases, which creates a surplus of aluminum, causing the price of aluminum to decrease.
What happens in the market with an upward sloping supply curve when there is a shift in the demand curve due to an external shock?
A new equilibrium price will be achieved over some period of time.
People often complain about price gouging after a natural disaster. Suppose the government imposed limitations on price increases in the aftermath of a disaster. One would expect
reconstruction to take longer because the quantity supplied of new materials would increase more slowly.
Scarcity implies that
a way of rationing supplies of goods must be found.
Given the existence of relative scarcity, resources can be rationed by
A system of prices.
Queuing, or standing in line.
Suppose that owners of high-rise office buildings are the main employers of custodial workers in a city. The city has decided to impose rent controls, and it has established a rent ceiling below the previous equilibrium rental rate for offices throughout the city.
How will the quantity of offices that building owners lease change?
How will the market wage and equilibrium quantity of labor services provided by custodial workers be affected by the imposition of rent controls?
The quantity of office buildings supplied will decrease.
The market wage will fall and the equilibrium quantity will fall.
he Canadian sugar industry has complained that U.S. sugar manufacturers 'dump' sugar surpluses in the Canadian market.
If the U.S. government chooses to sell its surplus sugar in the Canadian sugar market, there would be an
increase in supply.
This would cause the equilibrium price in the Canadian sugar market to fall, and the equilibrium quantity in the Canadian sugar market to
U.S. chocolate manufacturers have also complained about the high U.S. price of sugar.
If the U.S. government establishes a price floor LOADING... for sugar above the equilibrium price, it would cause a decrease in supply
in the U.S. chocolate market.
This would cause equilibrium price in the U.S. chocolate market to
rise, and the equilibrium quantity in the U.S. chocolate market to
The primary losers from minimum wages are
teenage and unskilled workers.
Import quotas are an example of government-imposed
Ron advertised his car for sale for $6000, although he was willing to accept $4000. When he finally sells his car for $5500, his producer surplus from the sale is
Price System (Market System)
An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant.
Price system features
Voluntary Exchange, Transaction Costs, Platform Firms
An act of trading, done on a mutually agreed basis, in which both parties to trade expect to be better off after the exchange.
All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of product, plus the cost of contracting and enforcing the contract. also, all costs associated with making, reaching, and enforcing agreements.
Companies whose services link people to other individuals who share their interests or who seek to buy firms' products, often via networks that the companies operate (aka Middlemen)
Increase in Demand
equilibrium price and quantity will increase
Decrease in Demand
leftward shift of the demand curve will result in a lower equilibrium price and lower quantity
Increase in Supply
rightward shift of the curve will result lower equilibrium price and higher equilibrium quantity
Decrease in Supply
leftward shift will result equilibrium price to increase and equilibrium quantity to decrease
Changes of demand and supply in the same direction
tend to generate a rise or fall in the equilibrium quantity. Equilibrium price is uncertain without more information
In a market-based economy, what is the role of a system of prices?
To address the problem of scarcity.
Government-enforced prices such as price ceilings
disrupt the rationing function performed by prices in a market system.
Rationing by the price system
leads to the most efficient use of available resources.
Prices in a market economy perform a rationing function because they reflect relative scarcity, allowing the market to clear. Other ways to ration goods in an economy include
first come, first served
Even when businesspeople can change prices, some rationing by waiting may occur.
Such queuing (waiting in line) arises when there are large changes in demand coupled with high costs of satisfying those changes immediately.
Government- mandated minimum or maximum prices that may be charged for goods and services
A legal maximum price that may be charged for a certain good or service- creates a shortge
a legal minimum price below which a good or service may not be sold. (ex:Legal minimum wages )
nonprice rationing devices
all methods used to ration scarce goods that are price controlled. whenever the price system is not allowed to work, nonprice rationing system will evolve to ration the affected goods and services.
A market in which goods are traded at prices above their legal price or any goods that are illegal
Rent control interfere with
construction of new units, owners not being able to cover cost of rental property, restrict tenant mobility,
What is the economic effect of price floors?
The minimum wage is an example of
a price floor
An above-equilibrium minimum wage will result in ________ in the quantity of labor demanded and ________ in the quantity of labor supplied
a decrease; an increase
a supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period.
With a price-
system, the government sets a minimum price at which, say, qualifying farm products can be sold. Any farmers who cannot sell at that price in the market can "sell" their surplus to the government. The only way this system can survive is for the government or some other entity to buy up the excess quantity supplied at the support price.
is placed on wages at a rate that is above market equilibrium, the result is an excess quantity of labor supplied at that minimum wage.
Quantity restrictions may take the form of
, which are limits on the quantity of specific foreign goods that can be brought into the United States for resale purposes.
Recommended textbook explanations
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